Question

Crowding out occurs because the government increases the demand for loanable funds, drives up interest rates, and causes: Select one: a. saving to rise. b. saving to fall. c. consumption and investment to rise. d. consumption and investment to fall.

Answer 1

Crowding out occurs because the government increases the demand for loanable funds, drives up interest rates, and causes Consumption and investment to fall.

Option (D) is correct

Explanation:

When the government increases its spending this leads to an improve in the interest rates, Crowding out means when the improve in the rate of interest leads to lesser investment in an economy. The fall in investment immediately due to increase in rate of interest is called crowding out effect.

So crowding out will result in consumption and investment to fall. When interest rate increases the loans become more expensive. This leads to less borrowing in an economy that simultaneously causes investment to fall. People will have less money to invest.